A construction contract between businesses is governed by the Commercial Code. The contractor is liable for defects present at handover. The employer must notify defects without undue delay after discovering them or when they should have been discovered, and within five years of handover for buildings. If a quality warranty is agreed, the warranty period replaces this period. Late notification does not, however, automatically extinguish the rights: the court considers the contractor’s objection, and the Act provides an exception where the contractor knew the cause of the defect.
When is the contractor liable for defects?
A construction contract between businesses (developer × contractor) is governed by the Commercial Code (§ 536 et seq.). Works are defective if their performance does not correspond to the result specified in the contract (§ 560(1)). The contractor is liable for defects present at handover (§ 560(2) in conjunction with § 554), and for later defects caused by its breach of obligations.
However, the contractor is not liable for defects caused by unsuitable items or instructions supplied by the employer if it warned of their unsuitability and the employer insisted on them (§ 561). Written reservations by the contractor during construction are therefore essential.
What is the deadline for notifying defects?
The employer must inspect the works as soon as possible after handover and notify defects without undue delay (§ 562(1) and (2)). For defects discovered later despite the exercise of professional care, the Act sets an ultimate notification period of two years, or five years for buildings, from handover. The court will deny remedies because of late notification only if the contractor raises the relevant objection (§ 562(3) in conjunction with § 428(2)). The contractor may not rely on that objection if the defects result from circumstances of which it knew or should have known at the time of handover (§ 428(3), applied as appropriate). Five years is therefore not a general time bar automatically extinguishing the rights. Where defects are covered by a quality warranty, the warranty period replaces that period (§ 562(2), § 563: the warranty period runs from handover).
What remedies does the employer have?
For defects, § 436 to 441 apply as appropriate (§ 564): depending on the nature of the breach, the employer is entitled in particular to remedy of the defects (repair or replacement performance), a reasonable price reduction, or, in the case of a material breach, withdrawal from the contract. The right to damages remains unaffected.
Practical recommendation
It is worth expressly agreeing the scope and length of the quality warranty, as well as retention or a bank guarantee for warranty defects. A handover record listing defects and outstanding work precisely is also crucial. We prepare contracts for contractors and developers through legal services for construction companies and construction contracts; if a dispute over defects is already under way, we represent you in defective works disputes.
This answer provides general information on the law as at 10 September 2026. It does not constitute legal services or replace an assessment of an individual case. The details of your situation may differ. Book a consultation to discuss them.
